Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

Asset Price Dynamics and Infrequent Feedback Trades

This article combines the continuous arrival of information with the infrequency of trades, and investigates the effects on asset price dynamics of positive and negative-feedback trading. Specifically, we model an economy where stocks and bonds are traded by two types of agents: speculators who maximize expected utility, and feedback traders who mechanically respond to price changes and infrequently submit market orders. We show that positive-feedback strategies increase the volatility of stock returns, and the response of stock prices to dividend news. Conversely, the presence of negative-feedback traders makes stock returns less volatile, and prices less responsive to dividends.     

“好”的不确定性、“坏”的不确定性与股票市场定价——基于中国股市高频数据分析

不确定性并不是都是“坏”的,“好”的不确定性也同样存在。本文采用Barndorff-Nielsen et al.(2010)提出的已实现半方差作为股票市场“好”的不确定性和“坏”的不确定性的代理指标,并在此基础上构建了相对符号变差(RSV),分析RSV对中国股市定价的影响。基于2007-2017年中国A股5分钟高频数据的实证研究发现:(1)与理论解释相一致,RSV与股票收益之间呈现负相关关系。无论是基于单变量分组、双变量分组还是公司层面的截面回归,这种影响在经济上和统计上都显著。(2)RSV是独立于已实现偏度的一个重要定价因子,且RSV对股票的定价能力强于已实现偏度的定价能力。(3)RSV对中国股市的影响是状态依存的,相对于经济景气程度高的状态,在经济景气程度低的状态下RSV定价影响更大。(4)基于RSV构建的投资组合的表现明显优于市场超额收益率组合、SMB组合和HML组合的表现。     

Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

We study the economic significance of social dimensions in investment decisions by analyzing the holdings of U.S. equity mutual funds over the period 2004–2012. Using these holdings, we measure funds’ exposures to socially sensitive stocks in order to answer two questions. What explains cross-sectional variation in mutual funds’ exposure to controversial companies? Does exposure to controversial stocks drive fund returns? We find that exposures to socially sensitive stocks are weaker for funds that aim to attract socially conscious and institutional investor clientele, and they relate to local political and religious factors. The financial payoff associated with greater “sin” stock exposure is positive and statistically significant, but becomes non-significant with broader definitions of socially sensitive investments. Despite the positive relation between mutual fund return and sin stock exposure, the annualized risk-adjusted return spread between a portfolio of funds with highest sin stock exposure and its lowest-ranked counterpart is statistically not significant. The results suggest that fund managers do not tilt heavily towards controversial stocks because of social considerations and practical constraints.     

Communication and Comovement: Evidence from Online Stock Forums

We study investor communication and stock comovement using a novel data set from an active online stock forum in China. We find substantial comovement among the returns of a stock and its “related stocks,” which are frequently discussed in the subforum dedicated to the given stock. Comovement is greater when the discussion of related stocks is more intensive. Further, the effect of communication on comovement is stronger for stocks associated with higher information uncertainty. Codiscussed stocks are more actively traded and experience more correlated trading. A trading strategy that exploits communication‐driven comovement generates abnormal returns. Our findings highlight the impact of investor communication on asset comovement.     

What's in a “China” Name? A Test of Investor Attention Hypothesis

We study whether a firm's name affects investor attention and firm valuation. Some Chinese firms listed on US stock exchanges have the word “China” included in their company names (“China‐name stocks”), while others do not (“non‐China‐name stocks”). During the 2007 China stock market boom, we find that China‐name stocks significantly outperform non‐China‐name stocks. This is not due to differences in firm characteristics, risk, or liquidity. The “China‐name effect” is largely consistent with the investor attention hypothesis that price pressure caused by increased investor attention on China‐name stocks during the boom period drives up China‐name stocks more than non‐China‐name stocks.     

The price of sin: The effects of social norms on markets

We provide evidence for the effects of social norms on markets by studying “sin” stocks—publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.     

Internet search intensity,liquidity and returns in emerging markets

Using a sample of listed companies in the Vietnam stock market from 2013 to 2018, this paper investigates the linkage between Internet search intenseness and stock returns and trading volume. The empirical results confirm the “price pressure hypothesis” that search intensity is positively associated with subsequent stock returns and trading volume. It also finds that the positive effects on stock returns are not temporary but remain for the long term although some reversals occur. The results show that the effects of search intensity on stock returns are higher for large stocks than for small stocks. The findings also reveal that stocks that attract more attention from the public are exposed to higher market risk. These findings have not been documented in the literature so they enrich the information on the relationship between Internet search intenseness and stock market returns, especially for emerging markets where Internet user numbers are sharply increasing.     

Political Party Affiliation of the President,Majority in Congress,and Sin Stock Returns

We find that in contrast to the stock market, which performs better during Democratic presidencies, “sin” stocks—publicly traded producers of tobacco, alcohol, and gaming—perform better during Republican presidencies and even more so when the Republican presidency is accompanied by a Republican majority in at least one chamber of Congress. We examine whether sin firms use contributions to establish connections with politicians and find that sin firms contribute more to Republican candidates and that these contributions are greater when Republicans are in power. We also find a positive relation between political contributions and future returns. The relation is stronger for contributions to Republicans.     

Save the Buyback,Save Jobs

In response to a recent New York Times op‐ed by Senators Schumer and Sanders deploring the effects of stock buybacks on workers and the economy, the authors explain the role of buybacks in increasing corporate productivity and in recycling “excess capital” from mature companies with limited growth and employment opportunities to the next generation of Apples and Amazons. Some companies, as Schumer and Sanders charge, are guilty of repurchasing shares in the name of “shareholder value maximization” instead of pursuing job‐creating investments. But as the authors argue, well‐run companies increase shareholder value not by boosting EPS through buybacks, but mainly by earning competitive returns on capital and investing in their long‐run “earnings power.” And by paying out capital they have no productive uses for, such companies give their own shareholders the opportunity to reinvest in other companies with promising prospects for growth and jobs. But the authors go on to note the tendency of companies to buy back shares not when their stock prices are low, but instead when the companies are flush with cash and nearer the top than the bottom of the business cycle. The result of this tendency, as research by Fortuna Advisors (the authors' firm) shows, is that fully three quarters of companies doing large buybacks during the period 2013‐2017 failed to produce an adequate “Buyback ROI,” a metric developed by Fortuna that indicates management's effectiveness in “timing” its stock repurchases. Given the usefulness of buybacks in recycling capital, the authors conclude that the most reliable solution to the corporate short termism and underinvestment problem is for companies to adopt better financial performance measures—including Buyback ROI—to guide their capital allocation. And when management determines that it has significantly more capital than value‐adding investments, but wants to avoid committing to unsustainable dividend increases, it should consider buybacks—but only if management is convinced that its stock price has not outpaced performance.     

Name complexity,cognitive fluency,and asset prices

We document three interesting phenomena in the Chinese stock market related to the complexity of stock tickers: Companies with more complex stock tickers are (1) held by fewer investors; (2) witness a lower turnover; and (3) experience lower returns during post‐IPO period. The change‐in‐change analysis based on ticker‐changing events generates consistent results. Such results are strong among companies with a higher level of individual investor ownership and stronger information asymmetry. Our findings confirm and extend Green and Jame (Journal of Financial Economics, 2013, 109:813–834) and support that cognitive fluency and name recognition influence investor behavior and asset prices.     

The ESG Integration Paradox

Today, most investment managers have something to say about environmental, social and governance (ESG) issues, and written ESG policies are ubiquitous. Yet, a written policy is not a reliable indicator of a firm's commitment. Actual ESG incorporation practices vary greatly, with most investment managers falling well short of full integration. Only a few firms seem to be using ESG factors to deliver alpha, hence, the paradox. If not implemented wholeheartedly, responsible investing can lead to lower financial returns. So, why have so few investment managers gone all the way? The paradox involves a “valley” of lower returns where portfolios first absorb the costs of ESG integration before the promised benefits materialize. In the early days of ethical investing, the focus was on using negative screens to exclude certain companies for moral or ethical reasons but lower financial returns are inherent to exclusionary screening. Hard exclusions force managers to tradeoff certain risks for others. So, for example, if the market discounts tobacco stock prices to account for changing consumer behavior, eventually tobacco stock prices become attractive again as, indeed, has been the case over the last two decades. Exclusionary screening alone is a self‐limiting strategy. By contrast, ESG strategies range from active ownership and engagement, to positive screening (selecting for certain attributes), to relative weighting (sometimes called “best‐in‐class selection”), to risk factor investing, to full integration. Because the relationship between an asset manager's ESG efforts and its risk‐adjusted performance is not classically linear, asset owners should look for managers that are on the upward slope of the ESG intensity curve and are fully committed to advancing up it.     

Changes in Expected Security Returns,Risk, and the Level of Interest Rates

Regressions of security returns on treasury bill rates provide insight about the behavior of risk in rational asset pricing models. The information in one-month bill rates implies time variation in the conditional covariances of portfolios of stocks and fixed-income securities with benchmark pricing variables, over extended samples and within five-year subperiods. There is evidence of changes in conditional “betas” associated with interest rates. Consumption and stock market data are examined as proxies for marginal utility, in a general framework for asset pricing with time-varying conditional covariances.     

Accounting information,disclosure, and expected utility: Do investors really abhor uncertainty?

Investors are said to “abhor uncertainty,” but if there were no uncertainty they could earn only the risk‐free rate. A fundamental result in the analytical accounting literature shows that investors buying into a CARA‐normal CAPM market pay lower asset prices, gain higher ex‐ante expected returns, and obtain higher expected utility, when the market payoff has higher variance. New investors obtain similar “welfare” gains from risk under a log/power utility CAPM. These results do not imply that investors “abhor information.” To realize investors' ex‐ante expectations, the subjective probability distributions representing market expectations must be accurate. Greater payoff risk can add to investors' expected utility, but higher ex‐post(realized) utility comes from better information and more accurate ex‐ante expectations. An important implication for accounting is that greater disclosure can have the simultaneous effects of (i) exposing more fully or perceptibly firms' payoff uncertainty, thereby increasing new investors' expected utility, and (ii) improving market estimates of firms' payoff parameters (means, variances, covariances), thereby giving investors a better chance of realizing their expectations. Paradoxically, better information can be valuable to new investors by exposing more fully and more accurately the risk in firms' business operations and results–new investors maximizing expected utility want both more risk and better information.     

Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?

Roll [1988] observes low R² statistics for common asset pricing models due to vigorous firm‐specific return variation not associated with public information. He concludes that this implies “either private information or else occasional frenzy unrelated to concrete information”[p. 56]. We show that firms and industries with lower market model R² statistics exhibit higher association between current returns and future earnings, indicating more information about future earnings in current stock returns. This supports Roll's first interpretation: higher firm‐specific return variation as a fraction of total variation signals more information‐laden stock prices and, therefore, more efficient stock markets.     

Time Variation in the Covariance between Stock Returns and Consumption Growth

The conditional covariance between aggregate stock returns and aggregate consumption growth varies substantially over time. When stock market wealth is high relative to consumption, both the conditional covariance and correlation are high. This pattern is consistent with the “composition effect,” where agents' consumption growth is more closely tied to stock returns when stock wealth is a larger share of total wealth. This variation can be used to test asset‐pricing models in which the price of consumption risk varies. After accounting for variations in this price, the relation between expected excess stock returns and the conditional covariance is negative.     

智能财务分析与诊断机器人的开发及实证检验——来自我国A股上市公司的经验证据

近年来,随着人工智能技术的发展,金融、财务、投资、审计与会计的智能化问题引起广泛关注。本文应用人工智能技术,依据财务分析的基本理论和方法,结合中国上市公司财务特征,率先尝试开发了"智能财务分析与诊断机器人",用于评价上市公司的综合财务绩效。该款智能机器人具有"速度快""智能化程度较高""专业能力较强""相对公正客观"和"实用性较强"五大特点。本文应用该款机器人设计了两个投资决策实验,个股和组合实验结果均表明该款智能机器人能有效地评价和区分上市公司的财务绩效类型。根据其输出的综合绩效,买入高绩效型股票或组合,或买入绩效成长型的股票或组合,具有显著的超额收益;买入高绩效型股票或组合,比买入绩效成长型的股票或组合,具有更高和更稳定的超额收益。可见,基于人工智能的财务分析与诊断机器人具有稳健和有效的择股能力。     

Predicting returns in the stock and bond markets

Several predetermined variables that reflect levels of bond and stock prices appear to predict returns on common stocks of firms of various sizes, long-term bonds of various default risks, and default-free bonds of various maturities. The returns on small-firm stocks and low-grade bonds are more highly correlated in January than in the rest of the year with previous levels of asset prices, especially prices of small-firm stocks. Seasonality is found in several conditional risk measures, but such seasonality is unlikely to explain, and in some cases is opposite to, the seasonal found in mean returns.     

Asset pricing in China's domestic stock markets: Is there a logic?

China's stock markets have grown rapidly since their inception and have become an increasingly important emerging market for international investors. However, there are few systematic studies on how asset prices are formed in Chinese domestic equity markets; popular financial media even depict the market as irrational. In this paper, we study the asset pricing mechanism in the nascent Chinese stock markets, with the objective of identifying variables that capture the cross-sectional variation in average stock returns. We focus on the effects of various market imperfections in China. We find that while the market risk (beta) is not priced, there is a significantly negative relationship between firm-specific risk and expected returns. Chinese investors are willing to pay a significant premium for more liquid stocks or for dividend-paying stocks. Furthermore, investors value local A-shares more if there are offshore counterparts (e.g., B- and H-shares) for foreigners, implying that a Chinese firm with a foreign shareholder base has a lower cost of capital, ceteris paribus. Lastly, as with U.S. and other mature markets, firm size and the book-to-market ratio are systematically related to stock returns. Given market imperfections, stocks are priced rather rationally in China, despite the widespread perception to the contrary.     

On the Stability of the Cross‐Section of Expected Stock Returns in the Cross‐Section: Understanding the Curious Role of Share Turnover

In this paper, we shed further light on cross‐sectional predictors of stock return performance. Specifically, we explore whether the cross‐section of expected stock returns is robust within stock groups sorted by past monthly return. We find that the book/market and momentum effects are remarkably robust to sorting on past returns. However, share turnover is negatively related to future returns for stocks with abnormally low stock price performance in the recent past, but postively related to returns for well‐performing stocks. This casts doubt on the use of turnover as a liquidity proxy, but is consistent with turnover being a proxy for momentum trading which pushes prices in the direction of past price movements. Our results are robust to both NYSE/AMEX and Nasdaq stocks, and also robust to stratifying the sample by time period.